Be Smart About Retirement

Last week we talked about saving for your children’s education, but it’s even more important to create realistic plans for your own retirement. While you want to do the best for your children, you don’t want to ignore your own interests and jeopardize your ability to live comfortably later on. Retirement lasts longer than it used to: A man who’s 50 years old now is expected to live to be 82, while a woman is expected to reach 85.

A typical working-age household has only $3,000 in retirement account assets, while even those nearing retirement have only $12,000.

More than 80% of working-age households have retirement savings worth less than their annual income (whereas the financial industry benchmark is to have enough retirement savings to replace 85% of your income per year of retirement).

About 45% of working-age households have no assets in a retirement account.

Only half of private sector employers offer any kind of retirement plan—even 401(k)s.

Only half of employees who have access to a workplace retirement plan bother to participate.

Many people think that Social Security will provide a large chunk of their retirement income. But look at the numbers: The maximum the highest earners will receive if they retire today at their full retirement age (66) is $2,533 a month. If they wait until they’re 70 or older, the monthly check would increase to $3,350 but still be inadequate.

So, this means that you have to take the primary responsibility for your own retirement. Here are some ways to do that:

Retirement plan: Be realistic about how much you’ll need to live on when you retire. Calculate the minimum income you’ll need for housing, food, and other expenses, add in the extra amount you’ll want for travel or other discretionary expenses, and factor in inflation. We recommend saving 80%-85% of your current annual income for each year of your retirement. If you retire at 65, you should plan for at least 20 years of retirement.

Saving strategy: Set aside 10% to 15% of your income toward your retirement every month. Some of this amount may go toward an IRA, 401(k) plan, or other option, and the rest should go to a segregated account. Given today’s low interest rates, we recommend an investment account. If, for instance, you invest $10,000 today and it grows at an annual rate of 7%, 30 years from now you’ll have $76,000.

Tax-advantaged accounts: Be sure to take advantage of IRAs, Roth IRAs, 401(k) and profit-sharing plans, defined benefit plans and other retirement account options. The assets in these accounts typically aren’t taxed if you don’t withdraw before age 59½.

Depending on your income and other retirement plans, you may be able to deduct your regular IRA contribution on your tax return up to the 2013 limits of $5,500 ($6,500 if you’re 50 or older).

The contributions you make to your employer’s 401(k) plan come out of your paycheck before income taxes are calculated: In 2013, you can contribute up to $17,500 ($23,000 if you’re 50 or older). And we cannot stress this enough: At least take advantage of your employer match. If you don’t, you’re leaving free money on the table.

Reduce spending: Re-evaluate your expenses and think about how you can reduce your spending. Create a family budget. Before purchasing for a new car, jewelry, designer clothing or a bigger house, consider whether you really need this item or whether it would be wiser to put the money in a retirement account.

Asset allocation: When you are young, you are likely to follow an aggressive, growth-oriented strategy in your retirement accounts. However, as you get older, it’s prudent to begin allocating a larger share to fixed income and other less volatile types of investments.

Long-term care: Consider buying a long-term care plan while you’re younger (monthly rates soar if you wait until you near retirement). You may think that you’ll be one of the lucky ones who won’t need extended medical care, but if you’re not, you’ll be facing an expensive nightmare. MetLife’s 2012 survey of assisted living costs showed that the average assisted-living facility in the San Francisco Bay Area cost $4,595 per month, while the average skilled-nursing facility cost a whopping $10,380 per month. And even if you can live at home, you might need a home health aide or homemaker, which will run you an average of $25 per hour in the Bay Area (according to Mass Mutual).

The keys to retiring comfortably are starting early and being realistic. Your golden years should be golden, and we hope that this discussion helps to prod you toward that goal.